Former RBI Governor Raghuram Rajan believes the government is doing what it can to create physical capital but it needs to do more on human capital to create enough jobs. He pointed out that many bright and talented students are unable to access premier institutions like IITs, even though they have the potential.
"I was meeting an NGO here. He was saying we’ve got all these bright kids...really poor kids, we identified them, they're really smart but they can't get into the IITs, they can’t get into the tech colleges,” Rajan said in an exclusive conversation with Business Today Executive Director Rahul Kanwal on Tuesday.
"So, we have a thin layer of very good schools, very good universities. Can we expand that? Because that's where we are getting the people who are creating new jobs. Maybe it's to shift the focus of government spending," he said when asked about what the government can do to nudge the private sector to invest and create jobs which in turn will boost consumption. Rajan, who teaches finance at the Booth School of Business, suggested that the government can't get the private sector to invest easily. "You can talk a good game as a politician and say we're going to grow but these are hard-bitten business people and unless they see the underpinnings or they have this animal spirits from somewhere it's going to be very hard to get them to put their money in the ground."
When asked why the private sector is not spending, the professor said it was a big puzzle for him as well. "It's been delayed for a long time. When I was Governor 8 years ago, I used to worry about why isn't investment coming back on. That's the big puzzle. Partly, the answer is positive - it's because they have become more productive, and using their capital better. But partly, the answer is negative - they're not sure of strong demand going forward, and not preparing in time. Because if they see demand they should be preparing well in advance. So it's a big source of worry. this is a really big concern and a puzzle.
He believes part of the answer lies in a lack of confidence among business leaders. “Investment is a lot about animal spirits. It’s about the sense of confidence that private industry has about the future and also involves a certain amount of risk-taking,” he said.
Consumption has been sluggish among the lower middle class and poor for some time now, but now even the upper middle class is holding back on spending. "It may be due to concerns about the economic future, which means things like jobs. Do we have reasonable jobs? Are our children getting well-employed? Do we feel confident enough about the future to spend?” Rajan said.
When asked whether the Finance Minister should cut taxes to spur consumption, Rajan said it's not so much the tax rate he would worry about. He said the country's fiscal situation - though the government has spent a lot of time trying to keep it on track - is not that sound. "When our nominal growth is where it is our debt starts becoming an issue with the kind of combined government and state and central fiscal deficits. We don't have much room to expand spending without seeing debt grow much faster than we want."
The economist suggested more effective spending by the government, particularly on education, healthcare, and job creation. "I would say at this point, it's not so much on cutting taxes...I would say that focusing on increasing the quality of our human capital at every level whether it's the health of our children or improving the quality of primary schools, improving the quality of universities. Across the board, if we invest we have a chance in the new economy of the future."
On the economic slowdown in the second quarter, Rajan said that for some time he had been worried about the strength of consumption, which he said has been less than normal over the last 1.5-2 years. While infrastructure spending by the government has played a key role in driving growth, he noted its absence in the last quarter exposed underlying economic weakness. "And so you could see that when that is taken off, the economy is weaker than we thought it was.”
"Earlier the weakness was in the lower middle-class consumption and the consumption of the poor. Now, you're seeing upper middle-class consumption slow down somewhat.” Rajan attributed this slowdown to concerns about the economic future, including job security. "These are all signs that at the edges all is not well."